First-time investor - is it a bad deal?

Question

Hi everyone! First off - thank you to all the newer members who post questions I didn't realize I should have, and the members who have been learning from this site for so long - thank you for continuing to contribute!

I am a first-time investor that's midway through a deal for a triplex. Each unit is 2 bd, 1 bathroom. The building was built in 1981, and interiors have been updated over time. The median rent in the area is $1,200 for such units (as of the last 6 months, when looking back 12 months it was $1,300). The units are currently pulling in 900, 1100, and 1225 ($50 of this one is garage rent). The interiors are good with no major repairs needed. The exterior, however, has been ignored. Most significantly, the property is on a hill and has 4 decks. 3 of them need to be replaced pretty immediately as they're rotting and to us, leave us open to quite a bit of liability when they eventually go down. The retaining wall at the back needs to be repaired/reinforced, and the steps around the platform (flatwork) are uneven and without rails. We estimate that all of this will be $30-40K in work.

A last note - the building has a garage that we'd like to convert into a 1 bd, 1 bath unit as well. The garage is two cars deep by two cars wide, but only has one door. We think this will add significant value to the property as it'll bring the NOI up, and we anticipate a $40-$50K investment here.

Area: Colorado Springs, CO (in a nicer part of Colorado Springs that draws a lot of tourists and outdoorsy individuals)Price: Asking was $550, we bid $555 to beat out another offerConcession: After a lot of back and forth, the concession we've received is 15K off for a total price of $540Cash Flow: Excluding the major repairs, property will cash flow around $100/month (including property management) before the additonal unit and closer to $700 per month after the additional unit, conservatively.Loan Terms: 25% down, 3.5% rate 30 year loan

The CAP rate at the new price ($540K) is 5.8%, which is in line with other buildings in the area (Avg is around 6). There are not a lot of recent comps, unfortunately. Estimating out future resale value using NOI and cap rate after the new unit, I get to a selling price of around $730-$760 in the next couple years if we decided not to hold. I'm looking into whether our appraiser will do an ARV appraisal as well.

The sellers have been so difficult in this process, it's making me second guess the deal (along with COVID). Please - if you see any holes, or red flags - I'd love any feedback.

James Carlson · Answer

@Jessica O.

Congrats on getting the space under contract! I know what property you're talking about. Not many better places to be in Colorado Springs that Old Colorado City. You've got all the shops, bars and restaurants there, easy access back into downtown and super close to that grocery store.

There's a lot in your note, so a lot to unpack:

• Even at $1,200/mo rent, which sounds about right, I'm seeing slightly lower cash flow when I ran it through the calculator, but not nothing crazy. Just be aware that you might not be able to get that right away. (When do the current leases end?)
• What kind of problems is the listing agent/sellers giving you? Are you in the middle of the inspection process? Are they not willing to do any of the work? Did you happen to use an FHA loan? If so, those items you mentioned are almost certainly going to be flagged by the appraiser as conditions of funding. Heck, I've had conventional loan appraisals flag safety problems like that. So either way, the seller might have to deal with them.
• I'd call the planning department TODAY. Ask for the planner of the day. You might have to leave a message, but they're pretty good at getting back to you. Looks like you have that R4 zoning so you've crossed the first hurdle to getting a fourth unit in the garage, but definitely reach out because you never know what other kinds of requirements they have -- setbacks, bulk plane limitations, etc. 
• Are you house hacking by any chance? If so, I believe Colorado Springs' new Airbnb law allows for you to short-term rent in another unit as long as one of them is your primary residence. That can juice your returns.
• Whether this is a good deal or not depends on your goals. Are you in this for immediate cash flow? Is appreciation a factor? Are you house hacking Long-term I love so much in Colorado Springs, and especially in Old Colorado City. If you can break even cash-flow wise for now, with the idea of getting a fourth unit up and running, I love getting into a multi-unit.Not sure if this helps or not, but we bought a duplex (technically a house + carriage house on an R2 lot) in 2018 with some partners for $470,000 and just recently listed it for sale. It went under contract in 1 day for significantly over asking. Both units were updated a lot and there was a 3-car garage, but it's also just a 2-unit and was about a mile east of downtown, so not as desirable as OCC. 
• Not sure if this helps or not, but we bought a duplex (technically a house + carriage house on an R2 lot) in 2018 with some partners for $470,000 and just recently listed it for sale. It went under contract in 1 day for significantly over asking. Both units were updated a lot and there was a 3-car garage, but it's also just a 2-unit and was about a mile east of downtown, so not as desirable as OCC.

• Not sure if this helps or not, but we bought a duplex (technically a house + carriage house on an R2 lot) in 2018 with some partners for $470,000 and just recently listed it for sale. It went under contract in 1 day for significantly over asking. Both units were updated a lot and there was a 3-car garage, but it's also just a 2-unit and was about a mile east of downtown, so not as desirable as OCC.

Good luck!

Will Fraser · Answer

HI @Jessica O., welcome to the BP Forums and congratulations on putting together an enticing deal!  I would say that the deal sounds workable provided:

• - The deal would still work if you weren't able to convert the garage space
• - The local zoning would allow for the garage conversion

If both of those check out then I'd run giddily ahead :)